Navigating the Complexity of Drug Shortages in the Healthcare Industry

Over the past weeks, several gut-wrenching stories surfaced regarding the impact of drug shortages, such as that of a high school football coach who died after his chemotherapy supply ran out.

This is just one example.

I wish it weren’t so, but drug shortages are not new. They have, however, gained significant public attention, and were further exacerbated by the COVID-19 pandemic, which highlighted and intensified the existing vulnerabilities in the pharmaceutical supply chain. 

You’re probably wondering: Covid-19? Aren’t we done already?

You’d think…

While drug shortages are not a new phenomenon, their increasing frequency and impact on patient care have prompted a closer examination of the underlying causes and potential solutions.

And it’s reached to a point where even Biden is calling on hospitals to … (checks notes) pay more, to deal with the most recent drug shortages. 

But what’s causing these shortages, and is regulation the solution?

The Prevalence of Drug Shortages

As I mentioned above, drug shortages are not new, but they’re more prevalent post-Covid. The following graph illustrates how the number of drugs in shortage is continuously increasing, and it’s noticeable that the situation is similar in magnitude to what it was almost 10 years ago! 

Drug shortages occur for various reasons, including manufacturing issues, regulatory challenges, and economic pressures:

And I believe that these factors are somewhat related. 

Generic drugs, which represent a substantial portion of the market, are particularly susceptible to shortages. These medications are crucial for treating a wide range of conditions, yet their production is often hampered by thin profit margins and complex manufacturing processes.

But let’s delve deeper into the supply chain of these drugs. 

The Fragile Economics of Generic Drugs: A Closer Look at the U.S. Pharmaceutical Supply Chain

The market dynamics of generic drugs in the American healthcare system present a paradox. 

Though integral to treating countless conditions affordably, these drugs are priced so low that their production is becoming unsustainable.

If this reminds you of the cocoa shortage story, you’re right!

Generic drugs are typically celebrated for their affordability, especially when compared to their brand-name counterparts. However, while beneficial in controlling healthcare costs, their low price points have inadvertently created economic pressures that disincentivize manufacturers. The intense competition in the generics market, fueled by regulatory frameworks such as the Hatch-Waxman Act (1984), has led to what many experts describe as a “race to the bottom” in drug pricing.

This legislation was designed to encourage the proliferation of generic drugs by simplifying the approval process for medications chemically identical to their patented predecessors. While this act successfully expanded access to medications at lower prices, it also set the stage for current challenges by focusing competition almost exclusively on the price, neglecting other factors like manufacturing quality and supply chain resilience.

The generic drug market in the U.S. is not only characterized by low prices but also by significant market consolidation. A small number of wholesalers control a major portion of the market. This consolidation gives these entities substantial negotiating power, which they use to squeeze prices further. Pharmacy benefit managers (PBMs) also play a crucial role in deciding coverage and reimbursement rates, intensifying the focus on cost minimization.

What are the implications for supply chains?

These dynamics contribute to an economically efficient supply chain that lacks resilience. 

We’ve discussed the cost-resilience tradeoff multiple times, where manufacturers squeezed by diminishing margins often cut corners in production quality or exit the market altogether (both of which may lead to shortages). Generic drug production lines, especially for complex formulations like sterile injectables, are highly technical and costly to maintain, making them unattractive investments under the current economic pressure.

But let’s better understand what makes these supply chains so fragile.

The Supply Chain of Generic Drugs: A Fragile Equilibrium

The supply chain for generic drugs involves multiple stakeholders, including manufacturers, wholesalers, pharmacies, and healthcare providers. 

One way to think about supply chain management is how to handle the interplay between three critical flows: products, funds, and information. 

The following figure nicely illustrates the three flows in the supply chain for generic drugs: 

Parsing these flows: 

Products

• Manufacturers: The process begins with manufacturers who produce the drugs, including procuring raw materials (Active Pharmaceutical Ingredients, APIs, and other excipients), production, and packaging.

• Distributors and Wholesalers: After production, generic drugs are sold to distributors and wholesalers, who manage the logistics of delivering them to pharmacies, hospitals, and other healthcare providers.

• Pharmacies and Healthcare Providers: Finally, the drugs reach pharmacies and healthcare providers who, in turn, dispense them to patients.

Funds

• Payments to Manufacturers: The flow begins with payments from distributors, wholesalers, and sometimes large pharmacy chains or healthcare providers toward the manufacturers.

• Reimbursements: Payers (such as insurance companies, Medicare, and Medicaid) reimburse pharmacies and healthcare providers for the cost of the drugs dispensed to patients. This reimbursement often includes negotiated prices influenced by various factors, including pharmacy benefit managers (PBMs).

• Patient Payments: Depending on their insurance plans, patients may also contribute through co-pays or out-of-pocket expenses.

Information

• Regulatory Compliance and Reporting: Manufacturers must comply with regulatory requirements and submit information to regulatory bodies like the FDA. This includes data on drug safety, efficacy, manufacturing processes, and quality control.

• Supply and Demand Data: Information about demand for various drugs and manufacturers’ supply capabilities are shared among manufacturers, wholesalers, and healthcare providers to manage inventory and address potential shortages.

• Pricing and Contracting Information: Wholesalers and pharmacies receive information regarding drug pricing and availability from manufacturers. This information is often influenced by contracts negotiated with the help of GPOs (Group Purchasing Organizations) and PBMs.

• Prescription Data: Pharmacies collect and manage prescription information from healthcare providers and share prescription fulfillment data with healthcare payers for reimbursement.

This complex network must be managed carefully to ensure the availability of affordable medications while maintaining high standards of quality and compliance with health regulations.

When Things Don’t Flow

But these flows are also where the problems occur:

Product Flows: When firms shift their focus toward reducing costs, one of the main outcomes is issues with quality. 

Considering the rigorous regulatory environment and complexity of manufacturing certain drugs, quality issues are indeed a significant factor in drug shortages. Particularly for injectable drugs, stringent testing and adherence to numerous FDA regulations are necessary; a fact which also increases the potential for errors. For instance, something as minor as an incorrect count of vials can lead to significant delays. Other common issues include equipment malfunctions and documentation errors during sterility testing, which are critical steps that ensure the safety and efficacy of the drug.

The FDA conducts regular inspections to ensure compliance with manufacturing standards. In the event of a quality lapse, severe actions such as drug recalls or even plant shutdowns may be triggered, and that could remove a major producer from the market quite abruptly. An example of such a regulatory action occurred in 2021 when a Johnson & Johnson plant was found to be non-compliant with manufacturing protocols, leading to the disposal of 15 million vaccine doses and the subsequent shutdown of the facility.

These incidents underline the balance manufacturers must maintain to comply with rigorous safety standards while meeting market demands. The high stakes involved in producing injectables mean that even small errors can have a disproportionate impact on drug availability, significantly affecting patient care.

Fund Flows: The financial model for generic drugs often leads to minimal investment in manufacturing infrastructure. The low cost of generics, driven by fierce competition and significant market pressures from large buying groups and pharmacy benefit managers, discourages substantial capital investments in quality improvements or modern manufacturing facilities.

Information Flows: Lack of transparency and effective communication among the supply chain stakeholders can exacerbate shortages. Delays in reporting manufacturing issues or changes in demand can prevent timely adjustments in production, leading to supply-demand mismatches.

In other words, when trying to create a cost-efficient supply chain, it usually means more players, more flows, and ultimately, more things that can go wrong. 

Strategies for Enhancing Resilience

Biden is asking hospitals to pay more, which may work as a “quick fix,” but I’m not sure it’s going to structurally change anything. 

To counteract the challenges we discussed above, there are several strategies that can be employed to enhance the resilience of the drug supply chain.

Investing in Quality: Enhancing the quality of the manufacturing processes and facilities is crucial. This may involve more substantial financial investment from manufacturers, possibly supported by incentives such as tax breaks or government grants.

Improving Transparency: Greater transparency in the supply chain can help manage expectations and facilitate better planning. Sharing information about production capacities, pending shortages, and demand forecasts can help align the supply chain more closely with actual market needs.

Creating Strategic Alliances: Forming partnerships among manufacturers, suppliers, and healthcare providers can lead to more stable supply chains. These alliances can help spread risk and facilitate a more coordinated response to potential shortages.

Similar issues are also prevalent in the UK. 

The paper “Examining the impact of resilience strategies in mitigating medicine shortages in the United Kingdom’s (UK) pharmaceutical supply chain (PSC)” is motivated by the detrimental impact of medicine shortages on stakeholders within the pharmaceutical supply chain (PSC). 

The research aims to understand if resilience strategies can effectively mitigate the impact of these shortages.

The paper addresses two main research questions:

1. What resilience strategies mitigate the impact of medicine shortages in the PSC?

2. How do resilience strategies impact the PSC when mitigating medicine shortages?

The study uses a mixed-methods approach combining qualitative and quantitative research. The qualitative phase involves semi-structured interviews with 23 key actors in the UK’s PSC, while the quantitative phase involves surveys completed by 106 respondents. 

The findings indicate that both reactive and proactive resilience strategies play roles in addressing medicine shortages. Reactive strategies, such as increasing flexibility and visibility within the supply chain, helped tackle immediate shortages, but also increased relational issues like behavioral uncertainty. Proactive strategies, including forming strategic alliances and increasing structural flexibility, helped mitigate relational issues and contributed to a more resilient supply chain.

The papers’ main idea is that any strategy used to mitigate certain issues also has potential negative consequences. For example, increasing product flexibility seems like a positive strategy until you realize it’s more expensive (which is obvious), and increases complexity (and fragility). Another example is how the visibility of product availability increases panic buying. 

The practical implications suggest that PSC managers and decision-makers benefit from adopting proactive and structurally flexible strategies. These are cost-effective and enhance the supply chain’s resilience against shortages. The study highlights how strategic alliances and enhanced information sharing are important, proactive measures, that strengthen the supply chain’s ability to prevent and respond to shortages.

The study underscores the complexity of the pharmaceutical supply chain and the necessity of an approach that incorporates both immediate reactive measures and long-term proactive strategies to manage and mitigate medicine shortages effectively.

But just asking hospitals to pay more won’t solve much. 

Conclusion

While regulatory interventions are necessary for ensuring drug safety and efficacy, there’s a need for balance to avoid overly burdensome requirements that could exacerbate shortages. Streamlining regulatory processes, particularly for long-standing and essential medications with low-profit margins, could help maintain an adequate supply without compromising quality.

Drug shortages are multifaceted and involve economic, regulatory, and technical challenges. They require a coordinated approach that includes both market-based solutions and regulatory reforms. By understanding and addressing the complexities of the generic drug supply chain, stakeholders can work toward a more stable and resilient healthcare system. This will ensure the availability of essential medications, but also safeguard public health and improve outcomes for patients across the globe.